The invention generally relates to computers and data processing systems for financial planning purposes such as managing savings, tax and investment matters and the like. More particularly, the invention relates to a process for evaluating the financial consequences of converting an Individual Retirement Account (hereinafter "IRA") of the standard format to a new Roth form IRA. A number of additional features and objects will be apparent in connection with the following discussion of preferred embodiments and examples.
Congress has passed the recent Taxpayer Relief Act of 1997, and it created an alternative to the existing standard form IRA, which has been termed the "Roth" form IRA after Senate Finance Committee Chairman William V. Roth, Jr. Taxpayers with moderate current incomes--especially the self-employed or small-firm professionals and others who rely on IRAs for tax-advantaged retirement savings--are given the opportunity to make things simple:--pay the tax now, then forget about federal taxes on those IRA assets, no matter how much they grow.
Briefly, differences between the existing IRA format (which is termed here the "standard" form IRA) and the new Roth form IRA include the following. Under the standard form IRA, employed workers and spouses each could contribute $2,000 per year to IRAs, subject to strict rules for deductibility of contributions. A 10 percent penalty is imposed on most withdrawals made before age 591/2. The IRA account-holder must elect some year between ages 591/2 and 701/2 to begin withdrawing from his or her IRA, and then do so in accordance with strict rules on minimum distribution. Such as, if the account-holder begins withdrawing from the standard form IRA at age 591/2, then he or she must draw it down as if it were a 25-hear annuity (for comparison, if withdrawals are delayed until age 701/2, then the account-holder must draw down the IRA as if it were a 16-year annuity). Most significantly, withdrawals are fully taxable income.
The new Roth form IRA will allow employed workers and spouses a $2,000 per year contribution each. No tax deduction is allowed for contributions to a Roth IRA, but the income continues to accumulate tax-free. Unlike the standard form IRAs' qualified distributions from a Roth IRA are not includable in income and are not subject to penalty taxes. A "qualified distribution" requires that funds accumulate in the Roth IRA for at least five years following the initial contribution and that withdrawals are made under an acceptable condition, foremost being that the account-holder has passed the age of 591/2 (also, for general reference purposes, other acceptable conditions include that the taxpayer or an immediate family member is purchasing a first principal resident (and subject to a $10,000 lifetime limit), the taxpayer is experiencing long-term unemployment, or the taxpayer has died or is disabled). Also, with a Roth IRA, there is no required minimum distribution once the account-holder reaches age 701/2. Assets can grow tax-free indefinitely.
The key difference therefore is, contributions to a standard form IRA are made with pre-tax dollars and hence reduce taxable income by the amount of the annual contribution, while contributions to a Roth IRA is made with after-tax dollars. And so while there are no current-year tax savings with contributions to a Roth IRA, distributions are tax-free and can grow tax free indefinitely even beyond age 701/2. Distributions from a standard form IRA at retirement age are fully taxable as regular income and are subject to rules requiring minimum distributions.
It is recognized by the inventor hereof that taxpayers would desire when planning their retirement savings options, to compare how they would fare under the alternative forms of IRA. Indeed, special provisions permit existing standard from IRAs to be rolled over to Roth IRAs by taxpayers with adjusted gross income of less than $100,000. One consequence of rolling over a standard format IRA involves the payment of income tax and the penalty taxes, as well as any service fees of a financial planner. Given sufficient time, most taxpayers would do better rolling over their standard form IRA to a Roth IRA. However, rolling over a standard form IRA to a Roth form IRA is only advisable if the taxpayer lives longer than the break-even point. But the calculations for comparing various prospective outcomes in actual dollars, given various scenarios, get immensely complicated.
What is needed is a process for readily evaluating the financial consequences of converting a standard format IRA to a new Roth form IRA.
These and other aspects and objects are provided according to the invention in an process for evaluating the financial consequences of converting a standard format IRA to a new Roth form IRA. The process in accordance with the invention includes disclosing the substantial federal income tax consequences involved in converting the standard form IRA to the Roth form. The process further includes multiple options how a given IRA holder can manage the substantial tax consequences, including without limitation how he or she will fare if he or she obtains term insurance on the federal tax liability, or if he or she deducts the federal taxes and insurance premium from the rollover amount, or even the transaction fees from the rollover transaction. Other options included in the process according to the invention include disclosing financing options to finance the federal tax and insurance premium in order to preserve intact the entire IRA amount for rollover.
Additionally, the process according to the invention allows IRA holders to enter in estimated increases in federal tax rates in their retirement years. Whereas it is not known how the federal tax rates will change (if at all) in the ensuing years, the inventive process will allow entry of educated guesses so that the IRA holder can work through various chosen scenarios to see how he or she will fare under the chosen scenarios.
A number of additional features and objects will be apparent in connection with the following discussion of preferred embodiments and examples, including the disclosure of conveniently arranged video-style displays for self-explanatory entry of data and display of projected results based on the multiple various scenarios entered by a user of the process.